Forgive Us Our Debts

Spain looks north for a bailout.

Christopher Caldwell

July 30 - August 6, 2012, Vol. 17, No. 43

The Spanish congresswoman Andrea Fabra Fernández had some words of encouragement for her prime minister, Mariano Rajoy, last week. Rajoy, of the conservative Popular party, managed in June to negotiate a $123 billion rescue package for Spain’s troubled banks. Unlike his Greek, Irish, and Portuguese predecessors in search of bailouts, Rajoy does not have to place his government under the tutelage of European Union authorities.

He is in a delicate position, nonetheless. Other European countries had to vote this week on the Spanish rescue, and they wanted some evidence that Spain was serious about fiscal discipline. Rajoy therefore passed $80 billion in austerity measures with the votes of only his own party. He raised sales taxes. He cut perquisites won by Spain’s trade unions, including the extra de Navidad, a Christmas bonus for state employees. He cut the maximum duration of unemployment benefits. It was when the catcalls from the Spanish Socialist Workers’ party (PSOE) grew the loudest that Fabra Fernández leapt to his defense. “Way to go, señor, way to go!” she was seen to shout from her seat in the Congress of Deputies. “F— ’em!”

It is possible that viewers misread Fabra’s lips. If not, then it is likely that she was referring only to her howling opposition colleagues, not to the vast legions of Spanish unemployed. But, really, it was too good to double-check, and when millions of protesting leftists poured into the streets of 80 Spanish cities on Thursday, a lot of them had Fabra’s words on their T-shirts and placards. The anger and composition of these Spanish mobs adds a fresh complication to Europe’s debt crisis.

For decades, since the regime of Gen. Francisco Franco, Spain has had an overregulated labor market. It always offered ironclad job security. Today it offers superb benefits, too. Those who enjoy them defend the system tooth and claw, even as it generates mind-boggling levels of unemployment (24 percent for all workers, 51 percent for young people). And any long-term solution will make things worse in the short term. Marcos Peña, president of the government’s Economic and Social Council, says that with stronger-than-expected job growth, Spain can regain its economic level of 2007 by 2025.

This week’s protests are not likely to speed up that schedule. For a year a group of young people calling themselves the indignados have marched in Madrid, complaining, with some reason, about a system that locks them out. On Thursday, they joined forces with a group called Platform in Defense of the Welfare State and, less logically, pretty much every trade union in the country. That means firefighters, judges, and—alarmingly—policemen in uniform. To a German taxpayer, pledging one’s savings as collateral to rescue Spain’s banks must be looking like an increasingly risky investment.

Spain is not as corrupt as Greece, but it is a young democracy yet to form the habit of transparency. Thousands of small earners got bilked out of their savings this spring by investing in Bankia, a consortium of Spanish savings banks. Aspects of the latest bailout package were not debated in parliament at all. The opposition newspaper El País got documents relating to the deal from the governments of Germany, the Netherlands, and Finland. Finland assented to it only after Spain pledged $937 billion in collateral.

When the thrifty countries of northern Europe are asked to vouch for Spain’s debts, they are likely to have a couple of main worries. One is that the combined rescue measures of the EU, the European Central Bank, and the International Monetary Fund have now reportedly come to $2.7 trillion. Who is good for that kind of dough? Where will it stop?

A newer worry is that the funds Germans use to provide an equity cushion for Spanish banks could be “rededicated” to other purposes once the Bundestag has passed them. When Finance Minister Wolfgang Schäuble spoke before the Bundestag recently about the aid package, he reassured listeners that any debts would be guaranteed by the Spanish state and not by its banking system, intertwined though the two may be. It was reminiscent of arguments that aid agencies had used during the Somali famine 20 years ago about whether food shipments were passing through the hands of trustworthy warlords or crooked ones. The question of whether banks or countries will ultimately be responsible for the money now moving south is very much up in the air. Klaus Regling, the director of the permanent $610 billion bailout fund called the European Stability Mechanism (ESM), says his fund can give directly to banks, “and then there is no more liability for the country.”

Maybe. For now, the very means by which the money is to be delivered is in doubt. The ESM was supposed to be up and running this month. But in June Germany’s Left party asked the constitutional court to rule on its constitutionality. The court has taken the suit with the utmost seriousness. Germany has always found it hard to say “No” outright to the mendicant nations of the European south. Even seven decades after World War II, its first priority is always to prove itself a good neighbor. But for the very same reason, it insists on doing so only in strict accordance with constitutional forms. The ESM is a semi-accountable authority dreamed up by two dozen panicked foreigners at 3 o’clock one morning last winter. To give it billions in taxpayers’ money raises questions of due process and taxation without representation. The constitutionalcourt decided the Left party’s question was a worthy one. It will rule September 12 on whether the ESM can be used at all. Until then, Spain’s bailouts will be carried out under the EFSF, an older bailout mechanism.

Finance Minister Schäuble wanted the court to move faster than that. He warned that too slow a vote could make investors nervous and cause “significant disturbances” in the markets. Such pronouncements leave one with an uneasy feeling. Under pressure of the financial crisis, the eurozone has become a place where countries’ laws follow investors’ whims, and not vice versa.